SLB Third-Quarter Earnings Call - SLB LIMITED

Explicit Guidance:

• Q4 2026 Revenue: Expected to reach approximately $10 billion, representing a 5% to 7% sequential increase and ~5% year-over-year growth; assumes Middle East revenue remains flat at $1.9 billion (approx. 83% of Q4 2025 levels).
• Q4 2026 Earnings: Adjusted EBITDA margins expected to expand by 100 to 150 basis points sequentially.
• Q4 2026 Margins by Division: Production Systems, Well Construction, and Reservoir Performance expected to drive combined core division revenue growth in the low single digits, with Production Systems seeing high single-digit growth; Digital revenue expected to increase in line with historical trends; Data Center Solutions expected to accelerate.
• FY 2026 Capital Expenditures: Full-year capital investments (including CAPEX and APS projects) expected to be approximately $2.5 billion.
• FY 2026 Share Repurchases: On track to repurchase approximately $2.4 billion of stock, with total shareholder returns expected to slightly exceed $4 billion for the full year.
• FY 2026 Free Cash Flow: Expected to see a meaningful sequential step-up in Q4 due to lower inventory and higher customer collections, dependent on collection timing in specific countries.

Business-Segment Outlook:

• Global Core Divisions (2027): Expected to visibly outperform the market, driven by long-cycle offshore development, renewed exploration, production recovery investments, and the activation of Venezuela.
• Production Systems (2027): Anticipated to grow in high single digits in Q4, driven by the ChampionX integration, artificial lift, completions, and One Subsea awards; long-cycle deepwater projects (e.g., Mozambique) enhance visibility into 2027 and beyond.
• One Subsea: Backlog strengthened by multi-year awards; >30% year-over-year increase in Final Investment Decisions (FIDs) expected in 2026; One Subsea awards expected to surpass the $9 billion booking target set for the 2-year period, translating to visible revenue growth in 2027–2028 and beyond.
• Venezuela: Revenue expected to more than double in 2026; potential for multifold growth in 2027, with a long-term ambition to reach or exceed the historical peak of $1 billion in annual revenue.
• Digital: Full-year 2026 adjusted EBITDA margins expected to exceed 35%; anticipated to continue double-digit year-on-year growth in 2027. Growth vectors include Digital Operations (training/production), Digital Exploration (secular upcycle), and Data/AI (Lumi/Tele offerings).
• Data Center Solutions: Growth trajectory expected to accelerate; backlog includes hyperscaler contracts (e.g., Meta in Canada); run rate expected to surpass $1 billion by end of 2026 and $2 billion by end of 2027; expansion into Asia expected to broaden customer base beyond North American hyperscalers.
• ChampionX: Achieved mid-20s EBITDA margins in Q3; synergy target of $200 million to be achieved by end of 2026; international expansion (Middle East/offshore basins) and integration into SLB's production portfolio expected to drive further upside in 2027.

Market and Competitive Outlook:

• Global O&G Activity (2027): Global market activity expected to grow in the mid-single digits in 2027, assuming Middle East activity remains flat in 2026 and normalizes thereafter.
• Deepwater Development: FIDs expected to increase >30% year-over-year in 2026; momentum broadening across Latin America, Africa, Eastern Mediterranean, and Asia; One Subsea backlog visibility extended to 2027+.
• Exploration: Renewed investment expected in Brazil (Pelotas Basin, Atlantic Margin), Guyana, Suriname, Namibia (Angola), East Med, and East India/Indonesia; SLB participated in ~80% of high-impact exploration wells globally YTD.
• North America: Expected to continue solid growth driven by production recovery, digital, and data center solutions; Q3 saw 7% sequential growth.
• Middle East: Near-term uncertainty persists, but longer-term outlook strengthens; resolved conflict anticipated to serve as a catalyst for deferred activity in 2027, potentially exceeding pre-conflict levels due to the need to restore production capacity.

Macro / Industry Outlook:

• 2027 Market Assumption: Assumes Middle East activity levels remain at second-half 2026 levels in 2027 with no escalation of conflict; resolution would provide upside.
• Energy Security & Supply: Structural demand supported by the need to offset natural decline, replace reserves, and diversify supply; energy security prioritized globally, driving investment in long-cycle development and exploration.
• Crude Price Resilience: Management believes growth drivers (exploration, production recovery) are secular and resilient; even at crude prices of $65–$70, the cycle is supported by inventory drawdowns and the necessity of investment to meet future demand.
• Regional Recovery: Venezuela, Argentina, and Brazil highlighted as key drivers of investment; emerging markets in Africa and Asia offering broadening opportunities in conventional and non-conventional resources.

Strategic Initiatives:

• Calvion (Kelvion) Acquisition: Progressing well; dedicated integration team in place; expected to close in the first half of 2027; will accelerate SLB's position in AI infrastructure thermal management and data center solutions.
• Capacity Expansion: New manufacturing center in Canada established to support Meta data center projects; manufacturing and integration capabilities expanding into Asia.
• Technology Integration: Combining ChampionX chemicals/lift with SLB's production systems and digital tools; combining Kelvion thermal management with SLB's data center manufacturing to increase "share of wallet per gigawatt."
• M&A Strategy: Focused on closing the Calvion deal; no immediate further M&A anticipated for data centers, though share of wallet will be increased organically and through integration.

Risks and Headwinds to Outlook:

• Middle East Geopolitics: Ongoing tensions could disrupt activity; guidance assumes flat revenue in Q4 and continued flat activity in H2 2026; any escalation could negatively impact Q4 and 2027 performance.
• Collection Timing: The magnitude of Q4 free cash flow step-up depends on the timing of customer collections in certain countries.
• Cost & Pricing: Inflationary pressures on chemicals and other inputs; potential pricing pressure in core divisions; margin mix impact from high-growth but non-accretive data center business.
• Pension Volatility: One-off non-cash pension settlement charge occurred in Q3; while de-risked, future cost volatility remains a risk.
• Execution Risk: Integration of Calvion and ramp-up costs for new data center projects could temporarily impact margins.

Management Tone on the Future:

• Confidence Level: High confidence in an "inflecting upcycle" with "durable multi-year international investment cycle"; leadership is "uniquely positioned to capture this upside."
• Cycle Characteristics: Described as having "legs," driven by structural factors (energy security, reserve replacement) rather than just short-term price cycles.
• Strategic Shift: Emphasis on "production and recovery" (now >50% of portfolio) providing a "durable foundation" with greater visibility; shift from purely activity-linked to a mix of short and long-cycle exposure.
• Hedges: Guidance for 2027 is conditional on Middle East stability ("assuming... conflict doesn't naturally escalate"); explicit acknowledgment that Middle East resolution is the primary upside catalyst not yet priced in.

Miscellaneous:

• One Subsea Awards: Specific mention of ExxonMobil Deepwater Rovuma project in Mozambique contributing to global gas supply.
• Salyu Zaramco Award: Integrated well construction contracts for >450 wells over an initial three-year term.
• Digital Adoption: >750,000 feet of automated drilling delivered (near 50% YoY increase); Hillops monitoring >20% of active international rigs (>60% YoY growth).
• Q3 Financials: Revenue of $9.45 billion (up 5% sequentially); Adjusted EBITDA margin of 21.9% (up 71 bps); Free cash flow of $828 million.